Debt consolidation can change your life. By taking all of your various debt payments and consolidating them into a single monthly payment, often with lower interest rates and a clear path forward for paying off your debt in a reasonable amount of time, debt consolidation can do wonders for people in Las Vegas and the rest of the country.
But that doesn’t mean that debt consolidation is the correct decision for each and every individual who struggles with the burden of growing debt. If you’re considering consolidating your debt, take a second and consider the pros and cons.
In short, when is debt consolidation a bad idea?
What are the basics of debt consolidation?
Say you have a ton of different debt payments that you make each month. You have your go-to credit card that’s almost maxed out. You have your slightly smaller credit card that you use to supplement the other credit card when you can’t afford to use it. You have payments left to make on your emergency credit card, plus three or four store credit cards that you opened to get discounts and then started to use in spite of yourself. And those are just the payments you have to make in the first two weeks of the month.
Hurting your head yet? Then you can understand why someone would seek debt consolidation.
Debt consolidation takes all of those payments and consolidates them into a single monthly payment so you only have to worry about hitting one deadline instead of a bunch. Instead of having to work your paycheck, massage your finances, and miss some due dates to pay your balances, you just have to hit one date reliably and you’re on your way to paying off your debt.
On top of that, debt consolidation can reduce how much you pay in total each month and over the lifetime of your debt. That’s because instead of paying off debt with a wide variety of interest rates (some that are likely pretty high), you’re paying a single payment with a (hopefully) modest interest rate. The monthly savings are helpful and the money that you could save over the lifetime of your debt could really blow your mind.
Is debt consolidation a good idea for everyone?
No! Like most things in the world, debt consolidation doesn’t work for everyone one hundred percent of the time.
Debt consolidation is often helpful, even life-changing, for people in Las Vegas and elsewhere who are dealing with a ton of different payments every single month. That’s because it transforms their debt from an all-encompassing burden into a single manageable fee with a clear end in sight.
It’s also extremely helpful for people who have found themselves at the mercy of extremely high interest rates. With high interest rates, you’re barely making a dent in your actual debt each month if you’re just paying minimum payments – you’re just managing the interest. So if debt consolidation can bring the total amount that you’re paying towards interest per month down, you’ll be in pretty good shape in the long run.
But the real sign that debt consolidation is good for you is that you’re ready to make a change in the way you approach your spending habits.
People who can’t control their spending habits are the ones who end up running up unmanageable amounts of debt in the first place. They might open their first credit card to have on hand in case of an emergency. Then they see something they want that they can’t afford and decide in the heat of the moment to buy it and pay it off later.
A few transactions later, they’re already in too deep with their debt. And if that emergency they were originally planning for finally hits, they’re all of a sudden sitting on a huge burden of debt without much to show for it.
Debt consolidation only makes sense for them, then, if they’re ready to change their spending habits. Otherwise they’ll just run up their debt again in a few years anyway.
When is debt consolidation a bad idea?
We’ve covered who debt consolidation can work for. The much scarier but still necessary question is: who is debt consolidation bad for?
1. People who think that debt consolidation alone will solve all of their problems.
Here’s a difficult but very real fact: people who end up in significant debt at one point in their lives are extremely likely to end up in debt again.
You’d think people would learn how to avoid debt after falling victim to it once. But the statistics don’t lie.
The reason for this is that people often treat debt consolidation as if it’s going to be a magic solution to all of the woes associated with being in debt. They think that if they can just contain all of their monthly payments into one payment, keep down their interest rates and keep up with the minimum payments, their debt problems will take care of themselves.
They’re not totally wrong, but they’re not really right, either. Chronic debtors who think like this see all the credit that suddenly opens up when they consolidate their debt and they can’t help themselves. “My consolidated debt is more or less taken care of,” they say, “so it can’t hurt if I spend a little more on credit somewhere else, right?”
Wrong. Debt consolidation requires a more disciplined use of credit to really work. If you’re just consolidating your debt to open up more credit for yourself to use, then debt consolidation is not an effective long-term solution for dealing with the burden of your debt.
2. People who want someone else to do all the work for them.
There are a lot of debt consolidation services out there. Some rely on loans while others rely on savings accounts and other methods of helping you to consolidate any pay off your debt. Some are trustworthy and some feel more like fly-by-night scams.
In short, there are plenty of ways to consolidate your debt and plenty of people out there who want to help you. But none of them are going to work if you expect the service to do all the work for you.
Debt consolidation services exist to give you options and some structure to help you gain more control of your spending, your debt and your life. But they can’t force you to spend more responsibly or pay off your debt any faster than you’re willing and able to do.
If you’re approaching debt consolidation as a way to force yourself to pay off your debt instead of something you’re willingly and excitedly entering into, then debt consolidation likely isn’t for you. You’re looking for someone else to do the difficult, disciplined work of getting you out of debt when, in fact, you’re the one who should be in control.
3. People whose main short-term concern is their credit score.
Your credit score determines your creditworthiness. It helps lenders to determine if you’re a trustworthy, responsible person whom they want to lend to. It can even affect employment and housing decisions. In short, it’s a very important identifier of what kind of person you are financially.
If you’re struggling with your debt payments, the sad fact of the matter is that your credit score in the present is likely not that strong. If you’ve avoided making late payments as much as you can, it might be okay, but you’ll need to figure out how to responsibly deal with your debt in the long term before things go south.
All of that said, if you’re concerned about your credit score in Las Vegas in the short term, then debt consolidation might not be the best decision for you.
That’s because some forms of debt consolidation programs and services will likely carry an impact on your credit score with them. In most cases, that impact is going to be negative.
Why is that? It depends on what kind of debt consolidation program you’re entering into.
Debt consolidation programs that make use of loans to an individual debtor allow you to pay all of your debt off in one fell swoop, consolidating it into a single monthly payment.
But getting that loan requires that your new creditors make what is called a “hard inquiry” into your credit to figure out if you’re worth lending to. A hard inquiry is a deeper, more critical look into your credit than just simply checking your score and it can have a negative impact on your personal credit.
Other debt consolidation companies that don’t use loans, like those that make use of savings accounts, might not take hard inquiries into your credit, but they can still negatively affect your score. That’s because they generally require you to close all of your credit accounts at once. Closing all of your credit accounts can be a really positive move because it prevents you from running up any more debt until your debt problem is fully and totally dealt with. But closing those accounts can also bring your credit score down in the short term.
In the long term, though, it’s likely that you’re actually helping your credit score and creditworthiness over time. Credit inquiries and closing credit accounts are short-term dips that allow you to reduce or eliminate your debt burden and become more financially healthy, which in itself is a boon to your credit in the long term.
4. People who can’t afford to keep up with the debt consolidation program.
Debt consolidation is generally designed to assist you in eliminating as much of your debt as possible in as short a timeframe as possible. In general, this is a positive thing because it forces you to take a good, hard look at your spending habits, make changes and get yourself out from under the burden of debt in the near future instead of dealing with your debt, on and off again, for the rest of your life.
That all sounds great – but you need to be able to keep up with the program.
That means you need to be able to keep up with your monthly payments over the term of the program. If you fall behind and continue to make late payments, then the debt consolidation program which you’ve entered into is all for nothing.
It also means you need to be able to reign in your spending habits on your own. If the program doesn’t force you to close out all of your open credit accounts and get real about spending more realistic and responsibly, then you need to force yourself to do so. Otherwise you’ll just end up running up more debt over time, wasting time and resources in a debt consolidation program that won’t ever pay off the way it’s supposed to.
Responsible, reputable debt consolidation companies will do their best to make sure that you don’t bite off more than you can chew. But you have to be a willing and able participant as well in order to make the program work.
5. People who aren’t willing to change.
A willingness to change your spending habits and to change your life is absolutely the single most important quality an individual who is planning to enter into a debt consolidation service or program with a debt consolidation company must have.
Frankly, most individuals who have found themselves in unmanageable debt situations did not get their through no fault of their own. At some point in their lives, they developed a habit for overspending, spending beyond their means or simply not responsibly considering their financial options before deciding how to spend their money.
Of course, that is not the case one hundred percent of the time. Many individuals run up debt quickly and suddenly due to emergency situations over which they have little to no control.
Still, many people have a hard time controlling their spending habits, a problem which credit can serve to escalate. Through credit, suddenly things that were previously inaccessible become accessible to them. They just have to pay later instead of now. So what’s the big deal?
The big deal is that, unchecked, this kind of spending can drive a normally financially healthy individual into a lifetime of minimum charges, late payments and continuously growing, unwieldy debt.
Individuals who want to change that situation first need to change themselves. If they can’t cut themselves off from spending outside of their means and overusing credit, then they’ll never get fully out of debt.
But if you’re ready to make a real change and change your use of credit, then you might be ready for debt consolidation.